Cathy Dixon: Are events of today taking us back to the 70s?


AS we've seen the oil price spiral up with the invasion of Ukraine by Russia, inevitably comparisons are made with the early 1970s when the oil price quadrupled. This is a well-known landmark in economic history and resulted from Opec suspending oil exports to America in October 1973.

But there are important differences between the situation now and then. Probably the most significant is that inflation was already high ahead of the oil price shock: in 1971 it had risen to over 10 per cent and stood at about 9.5 per cent in 1973 just before the oil price rocketed. It then peaked at 26.9 per cent in August 1975.

It's hard to imagine this rate of price increases now – inflation currently stands at 5.5 per cent and the Bank of England base rate is 0.75 per cent. This is a 30-year high but is still a far cry from levels seen in the 1970s.

Inflation then was driven by a combination of factors, not just the oil price rise, in particular there was a rise of 29.4 per cent in wages in salaries in 1975, a wage price spiral which resulted in a fundamental rethink of economic policy. There are very important differences between the situation then and where we are now.

Firstly there is no wage-price spiral – in fact wage increases have been remarkably modest. Secondly, today’s economy is far less sensitive to changes in the energy price. It may not feel that way as we see the price of petrol, diesel and heating oil rocket, but the economy is far less dependent on energy for economic growth because of the decline in heavy industry (and industry in general) and improved energy efficiency.

Today’s rise in prices has led to speculation that the politicians will try and ease the burden for people, there is hope that the duty on oil will be cut for example and even calls for the rise in national insurance (due to begin next month) to be postponed. The Chancellor’s Spring statement on Wednesday is therefore even more eagerly awaited.

The situation is clearly very different, but it does not mean we will not feel the effects of rising prices (and oil in particular). We are already living through strange and unprecedented times: the global pandemic and war in Europe were not predictable!

Despite all of this, the markets globally have been remarkably calm. We have seen a notable surge in volatility but last week saw a strong recovery, with the S&P 500 rising by just over 6 per cent, the technology-heavy Nasdaq rise by 8.4 per cent and here we saw the FTSE 100 up by about 3.5 per cent. Somewhat surprisingly the FTSE 100 is up 0.27 per cent year to date.

Contrast this with the experience in the 1970s, when the oil price crisis led to a crash and a bear market that lasted from January 1973 to December 1974, affecting all major stock markets in the world. It was one of the worst stock market downturns since the Great Depression.

It is then not a case of history repeating itself, but these are difficult times and caution should be exercised.

:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.